Tuesday, June 25, 2013

As a basic rule of thumb, I don't think this is a
remarkable statement, although there are a group of criminogenic personalities
inside the underclass milieu who probably don't give a great deal of thought to
the question, and to whom, the receipt of a criminal conviction is little more
than a social rite of passage!

No, I am talking about most normal people, to whom the
receipt of a criminal conviction carries a real social stigma.

I have been very engaged recently in trying to understand
why Government and the regulatory agencies, have been so concerned to ensure
that they do not criminalise the actions of City practitioners, even when there
are very real transgressions of both the financial market law, and the ordinary
criminal statutes!

We are a very strange society in so many ways. We examine
all social activity for signs of behaviour which we deem unacceptable, and
where such conduct transgresses the moral law which means that other people
have been put at risk, we tend to treat it more severely than if the conduct
complained of was merely anti-social.

So, where a financier treats a client in such a way that
the clients' monies are put at greater possibility of loss or the client is
exposed to greater risk of suffering financially because of the conduct of the
adviser, we examine that conduct to establish whether he or she has behaved in
anything other than in a proper manner, and the loss sustained is due to
unforeseen market circumstances, or whether the conduct of the adviser was so
egregious that it directly contributed to the losses concerned!

Where the actions of the adviser or intermediary are
shown to have directly contributed to the client's loss or damage, society,
rightly, takes a much more severe view, and examines the actions of the adviser
to establish whether the criminal law has been broken.

Take, as an example, the actions of those in the Quality
Care Commission, against whom it is alleged that their actions, by suppressing
an important critical report into conditions inside a particular institution,
have caused such public distress and loss of confidence in the NHS, that there
is now talk of criminal investigations.

I suspect that the reason for this assertion of
criminality is more to do with the embarrassment that this episode has caused
to politicians as opposed to the damage to the Common Weal, but the end result
is that there will now be a criminal investigation of the conduct of the
persons involved.

Another example which I believe throws light on our
attitudes towards criminality is the treatment of Boat Race protester Trenton
Oldfield who has been refused leave to remain in the UK after the Home Office
decided his presence was not "conducive to the public good".

The Australian, who disrupted last year's University Boat
Race by swimming into the path of the crews, was jailed for six months for his
actions when he was found guilty of
causing a public nuisance.

The Judge said he had ruined the race for everyone:
"You caused delay and disruption to it and to the members of the public
who had gone to watch it and to enjoy the spectacle of top athletes
competing."

Adding that Oldfield's actions had endangered his life
and those of others, the judge said: "Your offence was planned. It was
deliberate. It was disproportionate. It was dangerous."

These elements may well be true, but was the offence so
egregious as to deserve a custodial sentence? I suspect that Oldfield was
treated so severely because he had transgressed the social rules of one of
Britain's most important class-focused sporting events, as opposed to anything
else. The man was clearly a bounder, and a foreign bounder at that and had to
be taught a big lesson, but was his behaviour so much more damaging and
dangerous than some financial adviser who cheats his clients of thousands of
pounds of their money, or who deliberately manipulates an important market
benchmark in order to enhance his profits, at the expense of many others?

I comment regularly on our national benchmark behaviour
in criminalising single mothers on benefits who fail to report the fact that
they allow a lover to stay the night, actions of such dishonesty which enables the State to convict them of
welfare benefit fraud, and I also comment on the paucity of criminal
convictions for those who work in the financial services industry, even when
they commit offences running into hundreds of thousands of pounds.

I have been wondering why this state of affairs is
allowed to continue to exist, and I have been amused beyond measure by the
observations of ministers following the recommendations of the Banking
Commission.

The talk is all of imposing prison sentences for reckless
bankers, but as I have already said elsewhere, when we deconstruct the
conditions precedent for any such prosecution to be brought, we discover that
the new proposed law is even more complex than the perfectly good existing law
on reckless conduct which could have been imposed normally, and will mean that
it is even more difficult to convict dishonest bankers.

So why is it that imprisonment for criminal offences is
so routinely abjured when it comes to dealing with financial practitioners?
What makes the crimes of the suites and the dishonest actions of the powerful
so different that they deserve to be treated in a different manner from the
crimes committed by the underclass in the streets?

One thing is certain, the City practitioner group
believes it deserves to be treated differently, and it has been often said to
me, 'we never once thought that we would be treated like common criminals.'

So where does that presumption come from?

The British have always adopted a schizophrenic attitude
towards the way they view criminal activity. There is the crime of the streets,
burglary, theft, mugging, joy-riding, rioting, committed by identifiable criminal types, and dealt with by
the police. Then there is the kind of wrong-doing that takes place within the
financial sector, but when it happens, it gets called something else
(mis-selling), and is dealt with by regulatory
agencies.

For some reason there is a complete distinction between
the two courses of conduct. They are, and have always been dealt with
differently; penalised differently; administered differently, and for some
strange reason which I only finally understood after I had studied the work of
Edwin Sutherland, considered differently by politicians, regulators and in many
cases, even by the general public.

Edwin Sutherland, who first coined the phrase 'White Collar
Crime' separated and defined the differences in blue-collar street crimes,
which are often blamed on psychological, associational, and structural factors.
Instead, he defined white-collar criminals as opportunists, who learn to take
advantage of their circumstances to accumulate financial gain. They are
educated, intelligent, affluent, confident individuals whose jobs involve
unmonitored access to large sums of money. Precisely because these criminals
were held in such high esteem, Sutherland claimed that society tended to turn a
blind eye to the crimes they committed.

In order to test this assertion, I once conducted an
academic research project where I asked a group of financial services
compliance officers to place in order of seriousness a series of criminal
offences. In the general list I included six typical identifiable criminal
offences such as theft, fraud, joy riding, robbery, while for the other six I
used recognisable terms such as ‘insider trading’, ‘churning’, ‘misselling a financial product for the purposes of
generating more commission, ‘misselling a financial product which meant that
the client was no better off, but which generated more profit for the company’,
‘front running’, etc.

Without exception, in excess of 60 respondents put the
identifiable ordinary crimes first in the list, while putting the financial
issues last. It was as if
activities which could be described in conventional criminal terms assumed a
far greater degree of social opprobrium than did financial crimes, even though
in pure legal definitions, all the offences alleged were equally criminal and
all should be investigated and punished equally seriously.

Financial practitioners do not fear regulatory fines,
mostly because they are not individually called upon to pay them. The burden
always falls on the shoulders of the shareholders, many of whom, if the
Standard Chartered Bank case is anything to go by, will not even blame the
Executives of the bank for landing them in this mess in the first place.
Regulatory findings will always find fellow practitioners who are willing to
sympathise with them. Public scandal can be difficult to handle, but rarely
does an executive get forced from office. He may quietly resign at a later
stage, but he does so with a well-padded pension fund and other generous benefits
to cushion his existence.

This whole issue of the suitability of punishment for
serious wrong-doing has been a critical element of the longer-term failures of
the former FSA to bring a robust approach to the regulation of the UK financial
market. Ultimately, it is prosecution for crime which the financial
practitioner truly fears, but if the market knows that the regulator is
deliberately avoiding adopting its prosecutorial role, then this will lead to a
realisation that the regulator has no real teeth!

It has always been one of the greatest ironies of the
whole regulatory conundrum that criminalisation for simple offences of ordinary
'crime' is one of the greatest fears of the Executives of the financial sector.

Ironically, it is not necessarily the sentence which is
passed which is of the most importance, the true fear of the financial
practitioner is of the verdict
of 'guilty' being publicly pronounced in open court. Such a verdict immediately
takes away the sense of being a 'protected species' which too many banksters
have believed they possessed for too long.

A criminal conviction places them on a par with other
ordinary criminals, people who under any other circumstances they would go out
of their way to avoid like the plague. The fact of conviction now puts them in
the same 'criminal class' category and it spells social and commercial death
for any city practitioner who has been so convicted. It is the ultimate
exclusionary weapon of social and reputational mass destruction.

So powerful is the impact of criminalisation that even
those who had once called the convicted man a friend find it very difficult to
continue to see him, even in a private social context. As for any further
dealings with him on a commercial context, such a thought would never enter
their heads. He is now entirely beyond the pale, and he can never be received
again inside the magic circle.

This is the fundamental point, a criminal conviction
marks the end of the bankster's career. He is out on his ear, in the street,
and no-one can do business with him ever again!

Can you imagine the impact that such an action would have
had on the careers of Fred the Shred, or Bob Diamond or any of the other monsters
of finance who have presided over the downfall of the British banking
reputation, if they had been, at some stage in their career, told that the
criminal activities being carried on in their banks would mean that they were
going to be prosecuted for permitting such activities to carry on? Do you not
think that it might have caused them to make enquiry and put a stop to whatever
was going on?

This may be what makes it so difficult for regulators to
bring such a powerful weapon
to bear on those whom they perceive may come from the same class and socio-economic background as themselves!
They won't admit this of course, and they tend instead to use the excuse that
financial crime cases are too difficult to get convicted, that juries do not
understand them, although that has never been my experience.

One of the reasons for the lack of public confidence that
permeates the body politic of this country is because the ordinary man and
woman in the street simply does not believe that their interests have any
champion, whether in politics, or government, and that they are merely expected
to carry on being the pawns in the game played by the rich and powerful.

I have spoken to literally hundreds of such people who
protest that they feel completely disenfranchised from any system which exists
to protect their interests, whether it be in the form of a fair hearing when
they have been cheated of their hard-earned money, or a forum from which they
can get equal treatment when they wish to challenge the arbitrary decision-making
of the financial institutions.

Civil servants, regulators and government departments
seem to exist to protect the interests of politicians and regulated members,
not to provide the citizen with any right of redress or fair hearing when they
have been defrauded.

One way to start reclaiming the balance of fairness would
be for the powers that be to treat financial practitioners with equal rigour
when they commit obvious criminal offences. Once the public got the impression
that there was only one law for all, and that it was applied with equal
fairness, it would go a long way to begin restoring confidence in the way this
country is run!

Saturday, June 22, 2013

On 19 June, 2013, the Financial Conduct Authority (FCA) announced
that they have fined financial arranger Gurpreet Singh Chadda £945,277 and
banned him from working in the financial services industry, for 'significant
failings' when conducting sale and rent back agreements.

This outcome proves that the FCA have not learned the
lessons of failure which so marked out the actions of their failed predecessor,
the FSA. This kind of pathetic refusal to prosecute wholesale financial
criminal behaviour is a sad return to the bad old days of the feeble
Fantastically Supine Authority . These weren't 'significant failings' these
were straightforward criminal offences of fraud, and this man should have been
prosecuted in the criminal courts, and a serious message sent to the financial
community that criminal behaviour in financial services will be treated as
such, and people who steal and defraud clients and other financial providers
will go to prison!

When single mothers on benefits routinely get prison
sentences simply for failing to tell the authorities that they have a lover and
that he stays the night, why should a man who just because he works in
financial services, receive an entirely different treatment when he steal
hundreds of thousands of pounds? It is the same grotesque differential that
means that the poor get prison while the white collar criminals get to walk
away from the consequences of their crimes.

Yet again, the FCA have proved that their Financial Crime
Team is simply not up to the job of investigating and prosecuting these
fraudsters, and instead, they have
shamelessly gone for what they would call a 'quick regulatory win', a
scalp on the tent post, any scalp will do, just so they can show their political
masters that they are doing something, anything, thus justifying their
significant salaries and their copper-bottomed pension benefits, oh yes, and
their bonuses!

The FCA investigated Chadda's involvement in seven sale
and rent back transactions between June 2009 and January 2010 and found serious
failings in all of them.

A sale and rent back transaction is an agreement where a
home owner sells their home and then rents it back from the arranger so as to
be able to carry on living there.

Often people who sell their homes in this way are
vulnerable as they are in financial difficulties and need to raise money to pay
mortgage arrears and avoid imminent repossession.

Chadda’s widespread failings included misleading the
sellers of the properties, who were his customers, by telling them he would be
buying their homes when in fact the purchasers were other people.

He also failed to notify the sellers that these
purchasers were not authorised or regulated by the FCA, which meant they were
not covered by the regulatory protections.

Chadda also helped purchasers to obtain mortgages in the
knowledge that he was giving misleading information to mortgage lenders. In the
seven sale and rent back transactions the FCA investigated, there was no
independent valuation and Chadda assigned values to the properties based on the
purchaser’s mortgage valuations or his own opinion.

He assigned to two properties a market value which was
significantly less than actual market value.

In one case, he or his representatives fabricated a
mortgage valuation to make it look as though the seller’s property was worth
substantially less than its real value.

Chadda deceived the purchasers of six of the seven
properties by obtaining mortgages when he knew that the mortgage lenders would
not knowingly lend money on a sale and rent back transaction.

In one case he drafted a letter that falsely confirmed
that the seller would not be remaining in the property after the sale.

Although the sellers expected to get a discounted price
for their properties, they did not know that Chadda was receiving the full
price for the properties from the purchasers.

In two cases he reduced the seller’s share of the sale
money by misleading them about the value of their property, and in one case he
exaggerated the legal costs that the seller had to pay, to further reduce the
amount the seller received.

In three cases the sellers got less than half of the
value of their property and in two of these three cases the seller only
received 38% of the sale price of their homes.

The FCA believes that Chadda received £695,277 from the
seven transactions as a result of his misconduct, and that these charges were
unfair and excessive.

In her usual way, Tracy McDermott, director of
enforcement and financial crime, made one of her usual pontifical statements
about Chadda's misconduct. She said;

“...Chadda’s misconduct is the most shocking we have seen
from a home finance arranger.

“He is a disgrace to financial services. He deliberately
misled his clients for his own personal gain and then repeatedly and cynically
lied to the FCA.

“Chadda is not fit to work in regulated financial
services and he presents a serious risk to customers and lenders alike with his
dishonest and unscrupulous actions.

“The unprecedented level of the fine for a sole trader
reflects our determination to deprive him of the gains he made as a result of
his misconduct.”

Chadda seriously aggravated his original misconduct by
making false and misleading statements to the FCA, failing to disclose relevant
documents and information and creating misleading documents. He also arranged
for people to impersonate his customers in order to mislead the FCA.

If ever there was a case whereby a person should have
been investigated and prosecuted for criminal offences, this was surely such a
case!

But what happens? The Regulatory Agency treats him as if
he has just failed to comply with some nit-picking regulatory niceties, and
fines him the equivalent of the illegal profits he made.

In other words, he has just disgorged his illicit gains,
but he himself has paid no additional penalty. Banning him from the industry
will be a pyrrhic victory as he will surely find other areas of business to
operate in where he does not need the same kind of supervision.

This man has clearly proven himself to be a danger to the
financial market, but he has been allowed to walk away from his criminal
actions, virtually unpunished. What kind of message does this send to the rest
of the industry, many of whom may be tempted to try on similar activities
themselves, as it is clearly so very easy!

The whole point of the Commission on Banking Culture was
to establish a new approach to regulating the financial market, so the crooks
and the wideboys did not get away with criminal actions.

Of course, Ms McDermott will continue to maintain that
her agency does not have the power to prosecute simple offences such as fraud.
The hearings during the Banking Commission scotched that interpretation, and Ms
McDermott knows very well that she can engage with such actions, if she has the
will so to do.

It's not difficult, any detective officer should be able
to instruct her in how to do it, and it should now become a routine matter for
the FCA, to prosecute all financial criminals, where the evidence exists to
demonstrate that there is a prima facie case to answer.

If this doesn't happen, and we continue to see similar
cases of manifest criminality and dishonesty being dealt with in a regulatory
manner, then we will know that despite all their protestations, the FCA is going
the same feeble way as the FSA.

So if this is going to be the case, then the question I
want to pose in this blog, before things get any worse, is whether we should be
able to expect better from our financial regulators?

The recent Commission on Banking Culture castigated the
FSA for its many failings, indeed, I can rarely think of an similar example
where a leading regulator was on the receiving end of such a series of
vituperative comments, and we were told that the new Financial Conduct
Authority was going to be a very different animal!

I think that the first question we are entitled to ask
ourselves is how it is that so many of the people who were in post under the
previously failed regulatory regime, are still in post under the new management
regime? If the last staff members couldn't do the job properly, why should we
expect them to be any more successful just because the organisation's initials
have been changed?

I raise this point because I feel very strongly that the
tradition of the 'safe pair of hands' or the 'one of us' mentality which
permeates the British Civil Service and Government Service, causes a sclerotic obstruction
in the body politic, and simply continues a culture of failure!

No-one who has any experience of the British banking structure
in recent years, possesses any illusions as to the organised criminal nature of
the edifice which has been routinely allowed to get away with the worst kind of
financial crimes and fiscal excesses, without anyone of stature or importance
being sent to prison for crimes which would make Al Capone blush for shame!

The persons responsible for allowing that state of
affairs to proliferate were a bunch of spineless individuals who found it
easier to turn a blind eye to the wrong-doing that was routinely being carried
on, simply because their political masters wanted a 'light touch' regulatory
environment.

Not one of these responsible people ever appears to have
gone to the relevant committee at H.M.Treasury, and said 'Have you any idea
what's going on - Do you know what some of these gangsters are doing?' No-one
wanted to rock the boat, no-one wanted to put their heads above the parapet.
Just keep your head down and push the paper and make the right soundings, and
pick up your salaries and bonuses!

I do not apologise for saying that this is a pathetic
state of affairs, and is a compounded admixture of incompetence and
professional cowardice, coupled with a complete moral vacuum, and we, the
investing public were being let down again and again and again.

And if the FCA continues to operate in this way in the
future, we shall continue to be let down again, and again, and again!

Thursday, June 20, 2013

Reading the City headlines, one could be
forgiven for thinking that the Government had been handed an important new
power with which to confront rogue bankers.

"...Greedy bankers to face prison as
Chancellor prepares new law to target reckless bosses who take risks with the
economy..."

screams the headline in the Daily Mail, as if
the Banking Commission had suddenly identified some rare and wonderful new
power that had never been used before.

It is of course, all complete and utter
bollocks!

These headlines are a deliberate opportunity
for David Cameron and George Osborne to present what appears to look like a new
and positive response to the cataclysmic failure of banking regulation which
has predicated the financial crisis, and the resultant recognition of the way
in which the ordinary British bank clients have been systematically defrauded
by an organised criminal cabal of bankers and brokers.

The Commission has recommended the following
proposal;

"...There is a strong case in principle
for a new criminal offence of reckless misconduct in the management of a bank.
While all concerned should be under no illusions about the difficulties of
securing a conviction for such a new offence, the fact that recklessness in
carrying out professional responsibilities carries a risk of a criminal
conviction and a prison sentence would give pause for thought to the senior
officers of UK banks. The Commission recommends that the offence be limited to
individuals covered by the new Senior Persons Regime, so that those concerned
could have no doubts about their potential criminal liability.

"...The Commission would expect this
offence to be pursued in cases involving only the most serious of failings,
such as where a bank failed with substantial costs to the taxpayer, lasting
consequences for the financial system, or serious harm to customers. The
credibility of such an offence would also depend on it being used only in the
most serious cases, and not predominantly against smaller operators where
proving responsibility is easier, but the harm is much lower. Little purpose
would be served by the creation of a criminal offence if the only punishment available
to the courts were the imposition of a fine, because substantial fines can
already be levied as a civil sanction with a lower burden of proof. We would
expect the determination of the available sentences to have regard to relevant
comparable offences..."

This proposal is so bound around with caveats
and pre-conditions as to make it virtually impossible to convict anyone for its
commission.

Even Fred Goodwin, the reckless and arrogant
former boss of RBS wouldn't grip the bars under these charges, because it would
be too difficult to prove.

First of all, the offence would only apply to a
very small group of individuals identified under the new and as yet untried
'Senior Persons Regime'.

Secondly, the bank failure would have had to
have failed with 'serious costs to the tax-payer', i.e, there had to have been
a huge financial rescue package involved, where the failure had what are described
as 'lasting consequences for the financial system', however that would have to
be defined; or, 'serious harm to customers'!

Well, if everyone has lost their money, and the
Bank of England customer protection plans are not warrantable, then no doubt
this condition might apply.

I am not trying to be deliberately awkward, but
as someone very skilled in the application of the criminal law, I can easily
imagine the smoke and mirrors that an experienced QC could draw around these
flabby definitions.

This is why I say that the likelihood of such a
charge ever being levied against a banker in the future for this kind of
activity is so unlikely as to be risible.

The Banking Commission and its attendant
satraps went to great lengths to consider how best this new offence should be
couched. They pussyfooted around the issue, demonstrating the traditional
reluctance of members of the Administrative class to even consider anything so
unpleasant as the imposition of a criminal conviction for persons who had failed
in business, no matter how spectacularly. They considered these issues to be
even more important than public concern!

Tracy McDermott, the Head of Investigations at
the failed FSA told the Commission;

"... A criminal offence will have a real
deterrent impact and satisfy public concerns only if it can be practicably
prosecuted. There are some big issues of fairness and individual rights in
relation to criminalising bad business decisions. There are various stages
along the spectrum in relation to business decisions, but it is a very big step
to say that we should criminalise incompetence or negligence. It is a much
wider question than simply whether the public are angry about this..."

See what I mean?

Ms McDermott is apparently far more concerned
with the '...issues of fairness and individual rights in relation to
criminalising bad business decisions...'
than she is to protecting the rights of clients or investors. She
appears to feel that '...it is a very
big step to say that we should criminalise incompetence or negligence...;
Indeed, Ms McDermott feels that this is more important, because '...It is a
much wider question than simply whether the public are angry about this..."
Yes, why worry what the public thinks, there are plenty more of them yet to be
fleeced!

It is crap like this that helps to explain why
the FSA failed in its function. No-one is talking about criminalising
incompetence or negligence, we should be able to hope that the Regulator could
be capable of dealing with this level of egregious behaviour, although they consistently
prove they are not as good at it as we might like!

No, what we are talking about is behaviour
which is so manifestly unpalatable that it falls into the realm of
recklessness, and the basic fact for all those crowing about the draconian
nature of the new proposals is that we have already had a law of recklessness
for many years.

There is no reason why bankers could not have
been subject to its provisions already, and in circumstances where it would
have been far easier to prosecute, albeit in full recognition that recklessness
is a difficult charge to prove.

Nevertheless, we don't need a new piece of
legislation, when the one we have is perfectly adequate, and only needs some prosecutor
worth his or her salt, and the bottle to get on with it, to prosecute these
useless, greedy bastards for all their worth!

Criminal law recognizes recklessness as one of
the mental elements to establish criminal liability. It demonstrates
less culpability than deliberate intention, but more culpability than
criminal negligence. The test of any mental element is always based
on an assessment of whether the accused had foresight of the prohibited
consequences and desired to cause those consequences to occur. The three types
of test are:

Subjective where the Court attempts
to establish what the accused was actually thinking at the time the guilty
act or series of actions was caused;

Objective where the court imputes a mental element
on the basis that a reasonable person with the same general knowledge
and abilities as the accused would have had those elements, or

Hybrid, i.e. the test is both subjective and
objective.

The most culpable mental elements
will have both foresight and desire on a subjective basis. Recklessness usually
arises when an accused is actually aware of the potentially adverse
consequences to the planned actions, but has gone ahead anyway, exposing a
particular individual or unknown victim to the risk of suffering the foreseen
harm but not actually desiring that the victim be hurt.

The accused is a social danger because they
gamble with the safety of others, and the fact they might have acted to try to
avoid the injury from occurring is relevant only to mitigate the sentence.
Note that gross criminal negligence represents such a serious failure
to foresee that in any other person, it would have been recklessness. Hence,
the alternative phrase 'wilful blindness' acknowledges the link representing
either that the accused deliberately engineered a situation in which they were
ignorant of material facts, or that the failure to foresee represented such a
danger to others that it must be treated as though it was reckless.

I am the first to admit that the law of
recklessness, when applied in the criminal sphere is a damnably difficult charge
to bring home and juries are very often reluctant to convict for its
commission.

For this reason, I have always maintained that
to ensure that the recognition of responsibility continues to remain alive in
the mind of bankers, it is important to prosecute all offences of whatever
nature, where a criminal offence is identifiable.

So, virtually all the PPI frauds could have
been the subject of criminal charges, the only problem being was that they were
so widespread that it would have literally flooded the Courts with work.
Nevertheless, there are times when selected prosecutions have to be brought,
because the outcome has a distinct ability '...pour discourager les autres...'

The problem lies not in the lack of criminal
charges available, as the Commission acknowledges, but in the willingness of
the Regulators to do anything about them. We know that the Labour Government
had issued strong decrees to back-pedal on the financial sector, to regulate
with a light hand, so perhaps we should not be too surprised when we see that
no-one was bringing any fraud charges against the bankers.

But what happened when the LIBOR scandals broke?
We cannot address those issues presently as criminal charges have been finally
laid against an individual and are sub judice.

The outpourings from the City Press about the
draconian nature of these new proposals should be disregarded in their
entirety, they are just puffing smoke to please their City PR snouts!

“...This is the most significant report into
banking for a generation. There has already been a huge amount of change in the
industry since the financial crisis but the banks recognise that more needs to
be done. Regaining trust is an absolute priority - we want the UK’s banking
industry to once again set the gold standard for professionalism and integrity.

“...We look forward to working with Government
and regulators to take forward the constructive proposals contained in the
report, learning the lessons of recent years in order to deliver a banking
industry which is trusted, financially sound and serves the interests of its customers,
shareholders and society...”

Did you spot the soft soap and the snake oil?

When organisations like the BBA, the most
guilty organisation of all when it comes to the failure to administer the LIBOR
management properly, can come out with claptrap like this, you know that they
aren't hurting. This is the City Establishment at its best, doing what it knows
how to do better than anyone - selling you and me a toothless pup, while
sharpening their own canine fangs for a better return to the hunt for profits
at our expense!

Don't believe the simpering smiles, the
protestations of wanting to regain trust or learning lessons, the 'how can I
help you' approaches we will all see for the next few months, the banks know
they have got away with it, because no-one has the courage to face up to their
excesses, and cut them down to size.

There will be lots of talk about break-ups and
re-thinks, but in the end, the City will carry on just like it always has
before. Governments and Parliamentary Commissions may think that they can
dictate to the City of London, but they can't, the banks will always win,
because as Willy Sutton, the great American bank robber once observed, 'that's
where they keep the money', and money, as we all know, is the real power!

Wednesday, June 19, 2013

The Report issued by
the Commission on Banking Standards falls into the same trap as so many similar
official submissions over the years. It is too wordy, it aims too far, and it
misses the point.

The point is that
they have completely failed to undertake any meaningful examination of the
criminogenic culture which permeates the banking industry, and they have
deliberately disregarded the possibility that what has been allowed to develop
is an organised criminal enterprise within British Banking.

The question we all
need to ask ourselves is that "as a result of this report and all the
consideration that has gone into it, will it change anything in the culture of
banking in the future?"

The answer, I
submit, is a resounding 'no'!

The first intimation
for me of this outcome was watching Sir Martin Jacomb, former deputy chairman
of Barclays Bank, general all round jolly-good-chap and well-known City safe-pair-of-hands,
talking on Newsnight last night, when all he could say of any substance was that
everything contained in the report was yesterday's news, that was then, this is
now!

This is a typical
response from someone who has been so enmeshed in the fabric of the City for as
long as Sir Martin has, and if that is all a man of his experience has to say
about it, then we already know that the City Establishment has discounted the
Report and its contents, and is already looking to the future, secure in the
knowledge that their lobbying impact has drawn the teeth of any proposals that were going to mean
anything.

This is very
worrying because it means that frankly, the Commission's report will be allowed
to fester on departmental shelves, small sub-committees will spend months
discussing its implications, and in the end, nothing will be done, as too much
time will have been allowed to elapse since the publication, and things will
have changed.

As I predicted a few
days ago, the proposal to introduce a new criminal offense will have absolutely
no effect at all, and I really don't know why they have bothered to even spend
time debating the issue. I will address this point, later in this blog.

First, let us
examine the issues which have concerned the vast majority of the ordinary
people in this country.

We, the daily users
of the banking sector have found ourselves prejudiced and financially damaged
by the actions of those whom we have trusted to give us good financial advice,
look after our savings or engage with our ordinary day-to-day banking
requirements.

We have been
defrauded if we bought PPI contracts, we were exposed to bank lending fraud
when we sought to borrow money to expand a business or enhance a property, we
were ripped off by bad service offerings, and we were forced to share the
embarrassment and the hubris, as our banks failed, were charged with money
laundering or engaged in criminal malpractice in the LIBOR markets.

We were further
defrauded later of the taxes we had paid to build schools and hospitals, when
the Government, which had wholly failed to regulate the banking sector, and
constrain their reckless lending and spending, then decided to give them vast
sums of public money to help keep them afloat.

As a result of their
criminal excesses and their reckless profligacy, thousands of bank employees
were paid salaries and bonuses at levels which would make Croesus envious, and
when we, the tax-payers were forced to bail the bastards out, they continued to
demand their million pound bonuses, ignoring the fact that we were keeping them
in their jobs.

The culture of the
banks in the latter years has been one of sheer greed, a lack of any normal
moral scruples, the ambition to cheat, defraud and steal from their clients, to
grab as 'big a piece of the client's wallet' as they could so do, and generally
to act in a way that exposed their clients, their shareholders and their
employees to shame, dislike and public
opprobrium.

Theirs was a culture
of 'anomie', of normlessness; they were behaving like mercenaries in a
criminogenic environment, and they were committing criminal offences. These
offences were already catered for in statute.

The report admits at
para 1174. "...A number of 'financial crimes' already exist relating to
money laundering, insider dealing, market abuse, misleading statements and
fraud or dishonesty. The Serious Fraud Office, for example, is able to
investigate and prosecute investment fraud, corporate fraud and public sector
fraud under the Fraud Act 2006, the Theft Act 1968, the Proceeds of Crime Act
2002 and the Money Laundering Regulations 2007. Individuals are prosecuted
under these and other powers..."

The report admits
ruefully; "...However, the
types of offence which give rise to criminal sanctions at present tend mostly
to involve individuals or small groups, and do not cover the apparent
mismanagement and failure of control by senior bankers which has been at the
heart of the recent concerns about standards and culture in banking..."

This is where the report gets it both right, in a way, but
also so wrong!

In any organisation,
it is simply not possible that small groups of underlings can be engaged in
widespread wholesale criminal, behaviour, but such conduct is completely
unknown to senior members of staff and supervisors.

Where big money is
being made, it is a fact that supervisors and executives, tend to look the
other way, and hope to deny all knowledge of the wrongdoing if it is ultimately
identified.

In other cases, such
as the PPI scandals, the supervisors and the executives were consciously
pushing for these criminal actions to be continued and enhanced.

One of my students
who has worked for a major City bank talked openly in class about her
experiences as a junior compliance officer during the LIBOR manipulations.

"...Everyone
knew what was going on, down on the floor...It was the talk of the trading
floors...you can't stop traders bragging and boasting...we all knew that some
of the traders were working the LIBOR rates to their own advantage...No-one
thought this was criminal..."

And there lies the
conundrum. No one stopped to think that what was going on was criminal!

Does anyone
seriously believe that this knowledge was not being discussed on the 5th floor
over the pre-lunch gin and tonics? Of
course it was, but it was always deniable!

It is this ability
to operate at arm's-length, and to deny knowledge of criminal culpability which
makes it more difficult to prosecute senior managers of firms where criminality
is discovered.

Regulators talk convincingly about the difficulties
associated with collating evidence to prosecute such cases.

The report states;

"...The FSA
pointed out the main obstacle to the successful use of criminal sanctions:

"...For a
criminal case the evidential burden will be even higher. There is, therefore, a
risk that a criminal offence of mismanagement however constructed would rarely
be prosecuted and consequently lose its deterrent value through its lack of
use.

Tracey McDermott
added:

"...we invested
a significant amount of time and resource into the investigations we did into
the failed banks, but we were not able to establish the evidence necessary to
take regulatory action, so even if there had been a criminal offence on the
statute book, that would not have got us there [...] a note of caution has to
be sounded that this will not be an easy offence to prove [...] If the evidence
is not there, it will not be there for criminal cases in the same way as it
won't be there for regulatory cases. You can debate whether we got that call
right or wrong, but ultimately the evidential standard is higher in criminal
cases rather than lower..."

This really
identifies the root element of the problem. It is something I have tried
repeatedly to point out to regulators and the Commission itself, which is that
most regulators are woefully and hopelessly ill-equipped to conduct meaningful
criminal investigations, because they have received no training nor do they
have any skills as criminal investigators.

As I stated in my
evidence to the Commission, evidence which was suppressed by its civil
servants;

"...One of the greatest tragedies of the British
regime of financial regulation, and one of its biggest failings, is that none
of those who hold down senior roles within the upper reaches of the regulatory
agencies, have ever once undertaken even the simplest form of criminal
investigation.They have never even arrested so much as a
shoplifter, and they do not know
how criminals will behave when they are being investigated; they do not know
what evidence is needed to bring these persons before a court and to obtain a
safe and proper conviction; they do not know how to go about acquiring even the most basic evidence which can be
used to convict a criminal; and perhaps most importantly of all, they do not understand
how to conduct themselves when they are being required to investigate a pattern
of behaviour which might prove to possess important criminal consequences. Put
more simply, they simply do not understand the signs of crime, and they are
therefore ill-equipped to deal with them even when they are staring them in the
face!

"...Yet these are the very people we put in
charge of our regulatory agencies, and we give them very complex investigatory
powers. Members of the ‘Great and Good’, people who have held down no doubt
important roles in academe or the law, (even the Serious Fraud Office has been
seriously criticised for its administrative failings), banking or other areas
of financial business, former civil servants or senior partners in leading
firms of accountants (if ever there was a serious conflict of interests it is
in appointments such as these), or people who are seconded from other
regulatory environments, but who have no experience at all in dealing with
criminals.

"...While they all possess undoubted skills and
experience, the one thing they all have in common is a complete lack of any
understanding of the function of the criminal temperament..."

None of these issues
have been debated in the report, all that has been proposed is a new offence as
follows;

"... The
Commission has concluded that there is a strong case in principle for a new
criminal offence of reckless misconduct in the management of a bank. While all
concerned should be under no illusions about the difficulties of securing a
conviction for such a new offence, the fact that recklessness in carrying out
professional responsibilities carries a risk of a criminal conviction and a
prison sentence would give pause for thought to the senior officers of UK
banks. The Commission recommends that the offence be limited to individuals
covered by the new Senior Persons Regime, so that those concerned could have no
doubts about their potential criminal liability..."

However, the
Commission feels that the circumstances under which this offence should be
applied are limited and specific;

"... The
Commission would expect this offence to be pursued in cases involving only the
most serious of failings, such as where a bank failed with substantial costs to
the taxpayer, lasting consequences for the financial system, or serious harm to
customers..."

This is a proposal
to give the headline writers something to write about, but it is never going to
happen! In reality, we should expect such a recommendation to be debated at excruciating
length, both publicly and in Parliament. The banking lobby will throw vast sums
of money at opposing the proposal, and we should expect no Parliamentary
timetable to be available to debate the proposal for a minimum of 2 years.
Putting it simply, I do not believe it will ever happen, because by the time
any meaningful window of opportunity has presented itself to put this on the
Statute books, Parliament will have lost interest in the debate.

As far as I am
concerned, the rest of the Report will do little to change anything very
greatly. As I said, Sir Martin Jacomb is already discounting it, and that means
the rest of the City is taking its cue from him.

The issues which
impact the ordinary British bank user the most remain untouched. The banking
lobby has proved its worth, and it has talked out or emasculated the impact of
any meaningful changes which might have made a real difference. This report
merely tinkers at the edges, and has done little to change the culture of greed
and dysfunctional conduct which has so identified the banking sector in the
past.

This is why I say
this is a fudge too far. The Commission have tried, through the production of a
worthy tome, to give the impression that they really mean business this time,
whereas the banking sector knows that whatever business is being planned, it is
business as usual!

About Me

Having spent my career dealing with financial crime, both as a Met detective and as a legal consultant, I now spend my time working with financial institutions advising them on the best way to provide compliance with the plethora of conflicting regulations and laws designed to prevent and forestall money laundering - whatever that might be! This blog aims to provide a venue for discussion on these and aligned issues, because most of these subjects are so surrounded by disinformation and downright intellectual dishonesty, an alternative mouthpiece is predicated. Please share your views with what is published here from time to time!